The Hershey Company (NYSE: HSY) — Q1 2024 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2024, compared with the three months ended April 2, 2023. Hershey operates North America Confectionery, North America Salty Snacks and International segments. The company cautions that seasonal effects mean quarterly results may not indicate full-year performance.
Financial results and liquidity
| Metric | Q1 2024 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $3,252.7 million | $2,987.6 million | +8.9% |
| Gross profit / margin | $1,676.1 million / 51.5% | $1,382.3 million / 46.3% | +21.3% / +520 bps |
| Operating profit / margin | $1,058.1 million / 32.5% | $799.9 million / 26.8% | +32.3% |
| Net income | $797.5 million | $587.2 million | +35.8% |
| Diluted EPS | $3.89 | $2.85 | +36.5% |
| Operating cash flow | $569.1 million | $755.4 million | Down $186.3 million |
| Capital expenditures, including software | $213.3 million | $176.1 million | Increased |
Cash and equivalents were $520.4 million at quarter-end, versus $401.9 million at December 31, 2023. Short-term debt was $1,289.6 million and total short- and long-term debt was approximately $5.4 billion. The $1.35 billion revolving credit facility was available subject to its terms; Hershey reported compliance with its covenants. Current liabilities exceeded current assets at quarter-end.
Operating cash flow fell primarily because working-capital items consumed more cash, especially higher receivables and payment timing. Financing included $569.8 million of net short-term borrowing, $273.4 million of dividends and $494.2 million of share repurchases. Management said liquidity was adequate for anticipated needs. Full-year 2024 capital expenditures are expected to be approximately $600–$650 million.
Changes and segment performance
- Sales growth reflected 5.2% favorable price realization and 3.4% volume growth, partly offset by a 0.3% foreign-exchange impact. Management said volume growth was partly due to accelerated shipments ahead of the ERP implementation completed in early Q2.
- North America Confectionery sales increased 10.4% to $2,707.3 million; segment income rose 6.8% to $948.2 million, while segment margin declined to 35.0% from 36.2%.
- North America Salty Snacks sales increased 1.9% to $275.1 million, but segment income fell 17.3% to $38.7 million; margin declined to 14.1% from 17.3%. SkinnyPop volume declined.
- International sales rose 1.8% to $270.3 million, while segment income fell 22.2% to $42.8 million; margin declined to 15.8% from 20.7%. Volume fell 4.8%, primarily in Mexico.
Management commentary, outlook and risks
- Gross margin benefited from pricing, volume, supply-chain productivity and a $208.4 million year-over-year improvement in commodity-derivative mark-to-market activity. The favorable derivative accounting affected reported cost of sales; gains on hedges for future purchases may not reflect underlying current-period operating conditions. Higher cocoa and other commodity costs, labor and other supply-chain costs, and unfavorable mix partly offset benefits.
- Management cited cocoa supply constraints related to adverse weather and crop disease. Cocoa futures averaged $2.60 per pound in Q1, about 74% above the 2023 annual average; the filing also reported cocoa market prices had risen approximately 140% since the start of 2024 and continued rising in April. Hedging and forward purchasing may moderate, but do not eliminate, cost exposure.
- Other expense increased to $32.0 million, principally due to a $31.4 million write-down of investments in partnerships qualifying for tax credits. The effective tax rate was 19.1%, compared with 22.7% a year earlier, mainly reflecting investment tax credits partly offset by state taxes.
- A new multi-year Advancing Agility & Automation initiative is expected to incur $200–$250 million in pretax costs through 2026, including $175–$225 million in cash costs. Hershey expects approximately $300 million of ongoing annual savings at completion. The company recorded $16.7 million of costs through Q1.
- Management expects moderation in consumer spending as cost fatigue and labor-market conditions constrain purchasing power. Other stated risks include commodity and supply-chain volatility, price elasticity, competition, geopolitical uncertainty, and ERP post-implementation disruption. The final ERP phase was operationalized in April 2024; the filing says implementation materially changes internal controls, which will continue to be monitored.
- Tax audits and disputes are ongoing in several jurisdictions; management believes adequate provisions have been made. It expects approximately $51.4 million of reductions in unrecognized tax benefits within 12 months. Ordinary-course legal proceedings are not expected by management to have a material effect.
The filing provides no clear full-year sales or EPS guidance in the supplied text. It does provide the capital-expenditure outlook and initiative cost and savings estimates above.
Important facts for investors to verify
- How much of Q1 sales and volume growth reflects shipment timing ahead of ERP, and whether that growth persists in subsequent quarters.
- How rising cocoa costs flow through inventories, hedges and gross margins, and whether pricing can offset those costs without weakening demand.
- Whether segment income and margins recover in Salty Snacks and International, where Q1 profitability declined despite modest sales growth.
- How operating cash flow and working capital evolve, and how short-term borrowing and the November 2024 note maturity are managed.
- Whether ERP post-implementation proceeds without material operational, reporting or control issues, and whether the productivity initiative achieves its estimated costs and savings.